FREE Trial

Suppose the dollar-denominated interest rate is 5%, the yen-denominated interest rate is 1% (both rates are continuously

Question:

Suppose the dollar-denominated interest rate is 5%, the yen-denominated interest rate is 1% (both rates are continuously compounded), the spot exchange rate is 0.009
$/¥, and the price of a dollar-denominated European call to buy one yen with 1 year to expiration and a strike price of $0.009 is $0.0006.
a. What is the dollar-denominated European yen put price such that there is no arbitrage opportunity?
b. Suppose that a dollar-denominated European yen put with a strike of $0.009 has a premium of $0.0004. Demonstrate the arbitrage.
c. Now suppose that you are in Tokyo, trading options that are denominated in yen rather than dollars. If the price of a dollar-denominated at-the-money yen call in the United States is $0.0006, what is the price of a yen-denominated at-the-money dollar call-an option giving the right to buy one dollar, denominated in yen-in Tokyo? What is the relationship of this answer to your answer to (a)? What is the price of the at-the-money dollar put? Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 71% (14 reviews)

a We make use of the version of the putcallparity that can be applied to currency options We have P ...View the full answer


answer-question-section
Answered By
tutor-profile-image
Munibah Munir
I've done MS specialization in finance’s have command on accounting and financial management. Forecasting and Financial Statement Analysis is basic field of my specialization. On many firms I have done real base projects in financial management field special forecasting. I have served more than 500 Clients for more than 800 business projects, and I have got a very high repute in providing highly professional and quality services.I have capability of performing extra-ordinarily well in limited time and at reasonable fee. My clients are guaranteed full satisfaction and I make things easy for them. I am capable of handling complex issues in the mentioned areas and never let my clients down.
4.60+ 467+ Reviews 648+ Question Solved
Related Book For  book-img-for-question
Derivatives Markets

Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

See More Books
Question Posted:
See More Questions

Related Video

A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

Students also viewed these Corporate Finance questions

Physics With Illustrative Examples From Medicine And Biology Statistical Physics 2nd Edition - ISBN: 0387987541 - Free Book